– NOKSEK at a make or break point; Today’s Norges Bank statement in focus
NOKSEK today appears to be at a make or break point, holding just above.1760 channel support in place since August. The correction was driven by yesterday’s slightly hawkish sounding Riksbank statement. Today’s (13:00 GMT) Norges Bank meeting will be important. We, along with consensus, expect unchanged rates but the tone of the statement could be slightly hawkish, though noting continued headwinds from a stronger exchange rate. The macro data flow in recent months has been strong and Governor Olsen’s comments (as recently as November-end) show rising house prices remain a distinct medium-term concern. On the other hand, the import-weighted NOK – which central bank tracks- is already stronger than the central bank had forecast for 2012 and even 2013. However, given that an unchanged rate profile is priced in for next year (we look for a tightening cycle in H1), the scope for disappointment is low and NOK should be supported. Accordingly, NOKSEK should provide opportunities to buy on the dip.
– JPY could rebound on an uneventful BoJ on Thursday
Gains in USDJPY have continued unrelentlessly with spot marking a new 84.44 high in the Asian session. The market is geared up for Thursday’s Bank of Japan announcement amid persistent pressure from the newly elected PM Shinzo Abe. We think that the likely options for the BoJ tomorrow include another JPY 10tn expansion in the asset purchases (like October). A Nikkei report suggested that the BoJ’s 1% inflation goal may be doubled, but that is not before the January BoJ meeting which also coincides with an update of the BoJ’s medium-term outlook. Hence, the meeting tomorrow may not be as spectacular as some are hoping for and may not justify the 60% additional premium the options market is placing on the event. An ordinary outcome may therefore see both spot USDJPY and implied volatility come back off, especially considering that short-JPY positioning continues to remain extreme. We think there could be some disappointment in store when the market realises that the new Government is unlikely to be as aggressively dovish as Abe was when he was the head of the opposition party. We are already noticing this in political commentary; today Abe stated that monetary policy alone was not enough to correct the strong JPY and beat deflation. This compares to comments in October/November when he was suggesting that BoJ easing was a panacea for the strong JPY and deflation.
– EUR on a year-end squeeze higher
The EUR remains a notable out-performer with EURUSD breaching 1.3200 to trade at a 7-month high. It is clear that it has been driven more from the EUR side with several EUR-crosses continuing to rally. Our view remains that further out performance could be seen as position-adjustment ahead of the year-end continues. Aside the EUR supportive flows, the main focus for the market remains negotiations related to the fiscal cliff. The clear break higher in the S&P 500 overnight suggests that markets are taking a more optimistic view that a deal gets finalised by the end of the week. The gap between ideologies shared by the two parties has narrowed considerably, though there continues to remain disagreements over the amounts involved (like income threshold for top tax rate). However, the latest moves are probably within the realm of negotiating tactics. A deal by the end of the week should support a risk-on environment with the focus shifting back to the Fed’s actions. The BNP Paribas STEER™ model continues to suggest that the rally in EURUSD remains supported by fundamentals and currently, spot would have to move above 1.3340 (upper band) for the move to look overstretched. We remain comfortable with our year-end target of 1.3300. On the data-front, the stronger German IFO expectations component in December follows that seen in the ZEW survey last week. Stronger survey data make an ECB rate cut unlikely near term.
BNP Paribas